Regulator begins probe into insider trading at Infosys
MUMBAI: The markets regulator is investigating a huge buildup of derivatives positions in Infosys Ltd’s stock before allegations of accounting malpractices raised in a whistle-blower complaint were made public, said two people with direct knowledge of the matter.
Exchange data showed that huge put positions, or the option to sell shares at an agreed price on or before a particular date, were accumulated in the November series contracts of Infosys at a strike price of ₹740.
Unknown traders first bought sizeable put options in the series expiring in September and held their positions through the October series.
The whistle-blowers’ letter, sent by a group of people who signed off as “ethical employees”, became public earlier this week and sent Infosys’ shares plunging by 16.2% on Tuesday, as investors dumped the stock.
If the share price falls below the strike price of the put option, then the difference between the strike price and actual price becomes the profit. Traders can make outsized profit in options trading, if their bet turns out to be correct.
“Such large build-ups for a large cap stock like Infosys is unusual to say the least,” said an analyst who declined to be named.
On Wednesday, Infosys’s stock, after opening 4% lower, rose 1.16% to end trading at ₹650.75. The whistle-blower complaint, sent to the Infosys board and the US Securities and Exchange Commission (SEC) on September 30, became public on October 21.
The whistle-blowers accused the company’s chief executive officer (CEO) Salil Parekh and chief financial officer (CFO) Nilanjan Roy of unethical accounting practices in a bid to boost revenue and profit.
“Considering that the complaint was not made to Sebi, it has taken suo motu cognizance of it. Infosys’s audit committee is already examining the complaint for its merit and was discussed on October 11. Sebi would seek the audit committee findings for any action,” one of the two people cited above said on condition of anonymity.
On Wednesday, BSE said Infosys failed to disclose the whistleblower complaint to stock exchanges as per listing norms and sought clarification from the company on this.
According to Listing Obligation and Disclosure norms, all material information needs to be disclosed, and whistle-blower allegations are not material until proven to be true.
Companies receive a number of whistle-blower complaints every year and they are disclosed only in annual reports. Firms disclose the number and nature of whistle-blower complaints without going into the content.
Proxy advisory firm Institutional Investor Advisory Services said that there are no easy answers to when companies should disclose whistle-blower complaints.
“When should the disclosure be made—once a complaint is received or when the board decides to investigate or once the investigation is complete and there is something more tangible to share with investors? Given the damage that the Infosys episode has caused, one can argue that the company should have been more forthcoming,” it said.
Both the CEO and CFO of Infosys were questioned by the board on the allegations on October 11 during the board meeting for its Q2 results, the second person cited earlier said, requesting anonymity.
Earlier on Tuesday, Us-based Rosen Law Firm had said it is preparing a class action lawsuit to recover losses suffered by Infosys investors in the US.
In 2017, Infosys had witnessed a protracted stand-off between its high-profile founders and the previous management over allegations of governance lapses and issues relating to severance package doled out to former executives, including EX-CFO Rajiv Bansal. Following the tussle, then CEO Vishal Sikka quit followed by some board members. Infosys co-founder Nandan Nilekani was then brought in as chairman to steer the company. Parekh joined the company in January last year as the CEO.
PTI contributed to this story.